Investing During Retirement

Many people spend a lot of time and effort investing their money for retirement. But it’s also important to figure out how best to invest your money in retirement. After all, you’ll want that money to last awhile. Consider these four rules to help make sure your money lasts throughout retirement.

Your parents and grandparents may have had it pretty easy when it came to their retirement income. Chances are that when they retired, they relied mostly on a pension and Social Security. Neither of those income sources required them to do much more than deposit the checks each month.

You, on the other hand, are a member of the Retirement Reinvented community, which is mostly self-financed and self-run. Although you may receive Social Security checks, most of your retirement income will come from the money you have managed to save. And once you transition into retirement, you’ll need to figure out how to manage your portfolio to produce enough income to live the way you want in retirement.
Over a period of two, three, or, yes, even four decades, super-conservative investments will likely not keep pace with inflation.
To help navigate your way through the challenges of investing in retirement, consider these four rules:
1. Get organized.
With the shift from employer-provided traditional pensions to do-it-yourself 401(k)s and IRAs, you no doubt have more retirement accounts than any previous generation. A typical retiree will have five to 10 investment accounts. These might include multiple IRAs you opened over the years, two or more 401(k) accounts from your current and previous jobs, plus taxable accounts at one or more banks, brokerage accounts, and mutual funds.

Once you retire do you really want to spend a lot of time buried in paperwork, keeping track of all those accounts? Probably not.

Besides, once you turn 70 ½, you must begin taking required minimum distributions from your tax-deferred accounts. Generally the fewer accounts you need to manage for those withdrawals, the better.

What to consider: Think about consolidating your accounts. You can combine multiple traditional IRAs into one unified account. Any 401(k)s from former jobs are also eligible for what’s known as an IRA rollover.
Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and may have distinct advantages and disadvantages.
  1. Roll assets to an IRA
  2. Leave assets in your former employer’s plan, if plan allows
  3. Move assets to your new/existing employer’s plan, if plan allows
  4. Cash out or take a lump sum distribution
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
2. Factor inflation into your planning.
It’s perfectly logical to think that once you retire, you can’t afford to take any more risks with your money. But relying wholly on CDs, money-market accounts, and other seemingly low-risk choices to park your cash could be hazardous to your wealth.

The reason: inflation.

Remember, you could very well live 20 or 30 years in retirement, maybe longer. Over a period of two, three, or, yes, even four decades, super-conservative investments will likely not keep pace with inflation. And “inflation is your biggest enemy in retirement,” says Frank Armstrong, author of The Retirement Challenge: Will You Sink or Swim?

Let’s say inflation also averages 3.6% a year over the next 25 years. Then something costing $100 today will cost $119 in five years, $142 in 10 years, and $242 in 25 years. So, $100 invested today would need to grow to $242 in 25 years just to cover the purchase of this same item.

What to consider: The best defense against inflation is creating a diversified investment plan that matches your risk tolerance and time horizon.

Consult with your financial advisor to devise a diversified investment plan that matches your specific goals, objectives and tolerance for risk.

For one thing, you’ll want to consider holding onto at least some stocks during retirement. Over the long-term, stocks offer the best potential for beating inflation.

The average annual return of the S&P 500 (a broad-based index of U.S stocks) since 1926 is 9.8%, more than six percentage points over the 3.6% average annual inflation rate of the last 25 years. The average annual return of Treasury bills — which are a pretty good proxy for savings accounts and money market funds — was about 3.7%, barely keeping pace with inflation.
3. Work with an advisor to set a realistic withdrawal rate for your investment income.
“If you plan your portfolio to last just your average life expectancy, you have a 50% chance of running out of money,” Grabiner says. That’s why if ever there were a place to play it safe for retirement, this is it. During retirement, don’t take out more from your investment portfolio than necessary.

Yet according to the 2011 Wells Fargo Retirement Fitness Survey, pre-retirees expect to make annual withdrawals equal to more than 10% of their retirement account balances. That pace could deplete a retirement fund in about nine years.
Likelihood of portfolio lasting over a 30-year retirement horizon
Source: Wells Fargo Advisors
What to consider: Plan on an annual withdrawal rate of no more than 4% or so from your investment portfolio. If you don’t think that amount will generate enough retirement income, start ramping up what you are saving now.
4. Maximize your income with a tax-efficient withdrawal strategy.
You’ll probably have a wide variety of investment accounts to tap into for your retirement income. But taking money out of some of them can mean higher taxes for you than taking money out of other ones.

Withdrawals from regular taxable accounts (such as mutual funds and brokerage accounts holding stocks) held for at least one year will be taxed at a top capital gains rate of 20% in 2014. Withdrawals from traditional IRAs and 401(k)s, however, are taxed as ordinary income; in 2014 that was as high as 39.6%. And as mentioned earlier, once you turn 70 ½, you must begin making withdrawals from your IRAs and 401(k)s.

Since any of these withdrawals will be added to your taxable income for the year, you might want to focus on taking money out first from any accounts taxed at the lower capital gains rate.

What to consider: Meet with your financial advisor to devise a strategy for which accounts to tap and how much to withdraw. Your goals are to minimize your taxes and to take any required minimum distributions, so you’ll preserve as much of your income as possible.

Key Points:

  • Consider consolidating your retirement accounts to make it easier to manage them in retirement.
  • Create a diversified investment plan for retirement income that matches your risk tolerance and time horizon.
  • Meet with your financial advisor to devise a strategy for which accounts to tap and how much to withdraw.

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